July/August 2020 Update
Current Market Conditions
Not much has changed from my vantage point over the past month. The COVID-19-related closures and tentative re-openings continue, while US citizens are left wondering what the next several months will bring.
Several stock market sectors had another solid month – boosted by Federal Reserve-induced low short-term interest rates, copious credit, expanded monetary supply, and open market purchases of bonds of any quality.
Long-term US Treasury rates continue their long descent to zero, with mortgage and other related rates following suit. Stocks are climbing a high “wall of worry” primarily because the Fed is pushing them to do so, and – as they say – there is no alternative (“TINA”).
Or is there?
As we discussed in recent Vailshire updates and memos, the massive expansion in money supply and credit isn’t benefiting only US stocks and bonds. Much more, we are seeing increases in the prices of bitcoin, cryptocurrencies, gold, silver, select real estate, and commodities… the latter of which remain near historic lows in terms of prices.
Strategies for Vailshire’s Separately Managed Accounts
As stated last month, when economic growth is tepid, inflation is accelerating, money supply/credit is expanding, the US dollar is weakening, and volatility remains elevated, the following assets historically tend to perform well:
- Gold miners and royalty companies
- Gold/Silver
- Utilities
- Real estate
- Bitcoin/Cryptocurrencies
- Technology and other growth stocks
- Treasury Inflation-Protected Securities (TIPS)
- Emerging markets
Our plan
Geopolitical and COVID-19-related uncertainties will continue to destabilize the market psyche, resulting in continued volatility and the need for vigilance and downside protection.
I continue to believe that the above-mentioned sectors/assets will outperform the general stock and bond markets… and have positioned our portfolios accordingly.
Our separately managed accounts will be allocated in the following cautiously optimistic, stagflationary manner:
- 25% US stocks (skewed towards growth/innovation)
- 10% Emerging market stocks
- 22-25% Real estate
- 3-10% Cash
- 20% Gold and gold streamers/royalties/miners
- 0-20% Bitcoin/Ethereum (based on personal preference and trading permissions)
Approximately 95% of Vailshire clients now hold some bitcoin in their brokerage accounts via the Grayscale Bitcoin Trust, which is great, but I would love to get that to 100%!
Conclusion
Stocks are climbing their proverbial “wall of worry” and bonds keep rising as their related yields fall. This has very little to do with economic fundamentals, which are terrible, and much to do with the historically unprecedented actions of the Federal Reserve and US Treasury.
However, the increasingly stagflationary conditions will lead to much greater returns in so-called “alternative” asset classes, and we are positioned accordingly.
For those Vailshire clients who are fully positioned across all of our high-conviction positions, the next 12-18 months should provide interesting and highly satisfactory returns.
Investing wisely with you,
Jeff
P.S. For those people who may wonder why I keep talking about #Bitcoin and its investment prospects with enthusiasm as frequently as I do, the following chart may provide some clarity. It is one of my favorite comparison metrics, the “Bitcoin to S&P 500 Index Ratio.”
As you can see from the chart, from 2009 to 2016, the value of one bitcoin was substantially less than the total value of the S&P 500. However, approximately every four years, the value of bitcoin increases dramatically… and the price of one bitcoin ($11,567.99) is now roughly 3.5x higher than the S&P 500 ($3,271.12).
That is some serious price appreciation! And I expect it to continue throughout the coming decade. Stocks are great, but bitcoin is better.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
